Commentary

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A Reminder from Berlin

Sorting out my old bookshelves I came across an old Isaiah Berlin Essay “The Pursuit of the Ideal”.  At the risk of being boring here is a very long extract, he begins the essay this way:

“There are, in my view, two factors that, above all others, have shaped human history in this century.  One is the development of the natural sciences and technology, certainly the greatest success story of our time — to this, great and mounting attention has been paid from all quarters.  The other, without doubt, consists in the great ideological storms that have altered the lives of virtually all mankind: the Russian Revolution and its aftermath — totalitarian tyrannies of both right and left and the explosions of nationalism, racism, and, in places, of religious bigotry, which, interestingly enough, not one among the most perceptive social thinkers of the nineteenth century had ever predicted.

When our descendants, in two or three centuries’ time (if mankind survives until then), come to look at our age, it is these two phenomena that will, I think, be held to be the outstanding characteristics of our century, the most demanding of explanation and analysis.  But it is as well to realize that these great movements began with ideas in people’s heads: ideas about what relations between men have been, are, might be and should be; and to realize how they came to be transformed in the name of a vision of some supreme goal in the minds of the leaders, above all the prophets with armies at their backs.  Such ideas are the substance of ethics …”

Yes indeed.

The substance of ethics.

The ideas that have dominated the minds and actions of our leaders over these past few decades, those that produced the day-to-day world we live in, those that resulted in the inequality and inequity of our modern western societies, those that created a giant rift in society between the mass and the few, and those that now need urgent reconsideration and change, those ideas are in sore need of an ethical reckoning.

High on the list of those ideas are those that came to dominate economics starting in the mid-twentieth century.

The pursuit of logic for the sake of formal clarity allowed economics to shed the social part of its social science designation.  Economics, as it attempted to emerge from its older “political economy” roots, found, that in order to do so, it had to dissociate itself from considerations and arguments about socially ethical questions.  It failed.  So it erected its own technocratic version.  Ethical virtue became synonymous with things such as efficiency and optimization.  Social morality was re-modeled to fit neatly whatever the most elegant formalization appeared to be.  The social was tossed aside as a source of inefficiency.  The market was lauded as the ultimate arbiter of right and wrong.  No matter what the consequences were.

That this allowed our leaders to pursue policies leading to the hollowing out of the post-war middle class, stagnation of living standards, and to the advance of extreme politics threatening democratic governance, was side-stepped as beyond the purview of economists.  Those economists engaged in public argument either defended the market as a source of all things virtuous or they slid uneasily back to retrofit older ideas within the mainstream view as if these ideas were somehow consistent with the relentless market logic they taught elsewhere.

After the mid-century turn in ideology, given so much intellectual heft by its economist enablers, the state became an object of derision and suspicion.  The question of state efficacy was always couched within a comparison with the supposed virtues of the market.  Never was there a sophisticated discussion of the ethical values being represented in that comparison.  Whole swathes of social-economic decision making, the very stuff of democratic oversight, were thus thrown over the side into the willing hands of the private sector.

The disconnect between the market as modeled and the economy as experienced  was never allowed to intrude into the sanitized versions of economics that dominated the entire period.  The private sector was assumed to conform to the absurd restrictions the economists imposed on their models to make them tractable.  That most practicing economists realized this gap between their theory and reality existed, and yet failed to create a newer more realistic economics, is a damning comment about the ethics of an entire generation of them.

The private sector is nothing like that modeled in economics.  Nothing like it.  In many respects it is the living disproof of economic theory.  That we have allowed,  for the best part of a generation, major social decisions to be made without democratic input or oversight is the fact of democratic demise that I think needs reaction.  It is the central fact of recent history.

Somewhere in the future people will ask how it was that the social cohesion and modest prosperity of the immediate post-war years was allowed to slide so precipitously.  The ideas of economics will have to be reviewed for culpability.

Berlin is right: it is a question of ethics.  Where is it?

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Some Critical Responses

It is always interesting to read what people say in response to what you write.  It is also always educational.  I enjoy the learning.

I recently wrote a short piece meant to be a little on the light side pondering the odd comparison of the use of the word essential in our vernacular understanding of it, and the way in which standard economic theory suggests we compute our various levels of worth.  I quoted J.B. Clark with respect to this latter point.  I made the point that Clark’s method is still the most well-worn within economic theory.

And then I was criticized for not reading enough economics to understand that there is no such thing as “economic theory”; there are, I was admonished, a large number of such theories, and that we are all entitled to pick and choose between them.  There was then mention of a number of economists who all sit outside the framework of standard economics and have been critics to one degree or another of it.  The implication was that I am unaware of these good folk otherwise I wouldn’t look at economics through the prism of having a central set of ideas that I , presumably erroneously, refer to as “standard economics”.

Well, allow me respectfully to re-assert my belief that there is, indeed, such a thing as standard economics.  It’s the kind of thing you will read in any well-selling textbook.  I have never asserted, however, that standard economics is an impenetrable monolith.  There are shades of grey within it sufficient to accommodate a great percentage of practicing economists.  It was to help encourage the creation and spread of an even greater plurality of ideas that I re-engaged with economics a couple of decades ago.

I don’t think that the existence of a standard set of ideas is controversial.  Why else would the literature be full of the arguments in the mid-twentieth century?  Why else would there be bookshelves groaning under the weight of critiques of the “Chicago School” etc? That there was a decisive shift in the profession of economics away from one set of standard ideas and towards another is indisputable.  So I take it, to borrow a vexed word from the subject itself, as axiomatic that there is such a thing as the standard set.  That this set is the only one in existence is not the issue.  No one would argue that.  But it is the dominant set.  It is the sharp end of economics as manifested in our cultural, social, and political discussions with respect to the economy, business, markets, regulation, and government policy.  It has infested more distant terrain like the law.  It has exported many of its methods and principles into common practice by ordinary people who have never studied economics, but accept its findings as “laws” or “scientific”.  The everyday lingua franca of business is positively brimming over with references back to standard theory.

It is this expansive impression of the modern discipline of economics upon our society that I am most interested in.

I am well aware that, within the safety of their profession economists, are generally willing to discuss the variety of ideas that comprise standard theory.  They are also usually careful to let everyone know that many — unfortunately too many — of the critical intellectual components of their overall edifice are somewhat frail when exposed to the rigors of reality.  I happen to believe that marginal productivity is one of those frailties.

I don’t think it ideologically extreme to write about this.

So, allow me to press on with my enquiry of economics.  The articulation of the web of ideas centered on marginal analysis, of which marginal productivity is a part, is very much alive and well in standard economics.  It is rolled out, often in subliminal form, to justify the distribution of incomes in our modern economies.  And it does appear to be an inversion of what most of the rest of society thinks as essential.  Jeff Bezos earns far more than the average worker in an Amazon warehouse.  Standard theory seeks to explain why.  Yet it is the latter, not the former, deemed essential.  The paradox exists.

None of this implies that someone like Simon hasn’t tried to describe the pay of CEOs.  The literature relating the various theories of the firm, which is my particular interest ever since I read Coase decades ago, is full but mostly marginal.  It is marginal because, as Coase pointed out, the very existence of something called the “firm” is a denial of the perfection of the markets that the more committed members of the standard theory favor.  Since this contradiction is hard, if not impossible to resolve without re-inventing a century’s worth of theoretical structures, it has been ignored.  This is despite the best efforts of Williamson, Winter et al.  And, yes, we all know about the so-called “capital controversy”, and that the Robinson argument was victorious in the battle but defeated in the war.

Just for the record: I like the idea that an economy is dominated by rule-based decision making rather than by a more extreme form of rationality.  Satisficing is a very comfortable concept.  I happen to think that the ignorance revealed by total factor productivity could be reduced by the abandonment of both “capital” and “labor” from a production function and replaced by more accurate inputs such as energy, raw materials, skill, and information or knowledge.  Heck, I would even find room for management in there.  I don’t think it possible to “maximize” anything in an economy because of the irreducible uncertainty facing decision makers.  Equilibrium is more an illusion than a fact because the system is bothy open and dynamic.  It may be useful as an investigative tool, but as a description of reality?  Oh, and I tend to see the world through the prism of evolution and complexity.  Yes, I am aware those things exist.

Finally: I see economic activities as as inextricably intertwined with other social and political activities.  They are not separable.  So I would expect there to be as many forms of economics as there are of politics.  I am encouraged that a number of economists are now being more empirically driven.  It’s about time.  Hopefully the days of grand and elaborate theories with intricate machinery that all has to fit neatly together are gone.  Economics needs a more modest moment. Perhaps the pluralism that I and others have been encouraging for a while will help in both making economics more humble and more useful.  Even so the residual effect on our culture of the ideas within standard theory, most notably the power of unfettered markets, will create a great deal of inertia that a modest economics might find difficult to overcome.  But it’s worth trying.

Meanwhile I will continue to poke a little fun at the more odd aspects of standard theory.  Even if it reveals a little of my own ignorance.

Odd things like marginal productivity.  And don’t get me started on revealed preference.

Doh!

Did I just say that again?

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Two Definitions

Two definitions, one for ‘essential’ and the other for the way in which, according to economics, people are rewarded for their work.

In recent weeks we have become accustomed to calling someone an ‘essential worker’.  These are our most important people.  They are, if the dictionary doesn’t lie, indispensable.  They are extremely important.  They are key, crucial, vital, and needed.  They sound pretty darned special to me.  They must be doing things that, were they not doing them, would bring the economy to a screeching halt.

My goodness, they must be paid a lot.  Surely anyone who is a vital cog in the machinery is paid commensurately with that importance.

Not really.  Not at all for most of them — the exception here in the U.S. being doctors.  No, most of our ‘essential workers’ are amongst our least well paid.  They cannot afford to live in the cities or towns where they do their essential work, so they commute and thus expose themselves to the risk of contracting the virus that is our current scourge.  They certainly aren’t paid for that risk, no matter what the finance textbooks tell us about risk and reward.  Apparently only the ‘risk’ managed by hedge fund mangers and their ilk matters, even though it turns out they aren’t essential at all.  Instead they sit safely ensconced in their second or third homes, or on their yachts, moving paperwork from one side of the desk to the other, and getting paid very nicely for all that incredible effort.

Economists tells us that people are paid for what they produce ‘on the margin’.  Indeed, marginal productivity, as this particular piece of economic fiction is called, is fairly uncontroversial even among the so-called progressive economists. John Bates Clark describes for us the effect of this oddball idea:

“the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates”

It’s a natural law!  It sounds pretty sensible too: you get out what you put in.  Sort of.

And it seems to imply that economic theory is comfortable with our most essential workers not adding much to our collective wealth.  Whereas hedge fund managers on their yachts moving paperwork around do.

Which is upside down.  But that’s not unusual for economics, whose most ardent practitioners take a particular delight in being counter-intuitive.  So, whereas those of us poor souls who think words have regular meanings would think that essential workers are those who are adding the most value, economists and their more irregular meanings don’t think that at all.  Isn’t this counter-counter intuitive?  Are economists so befuddled by the elegance of their machinery that words have lost all meaning?

Marginal productivity only exists in order to establish a ‘natural law’ to frighten workers into believing that they have to settle for poor wages — who can overturn a natural law?  The fact that society sees some workers as essential doesn’t matter to economists.  What matters is preserving a variety of interlocking intellectual marvels so that their Ptolemaic apparatus doesn’t implode.  That this produces circumstances where essential seems to mean trivial rather than vital is not an issue.  The goal is to preserve the machinery, it is not to make sense.

So one of the bedrocks of economic theory says that our most important workers are doing something that adds little to no value.  They are essential but, well, not essential.  They are hugely important to the workings of the economy, but ought be poorly paid because of their insignificance.

Am I the only one to find this odd?  I must have missed something really counter-intuitive.

Maybe it’s the pandemic playing with by mind.

And, don’t get me started on ‘revealed preference’!  We can laugh at that another day.

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Our “Scheidel Moment”?

We are all familiar with what a “Minsky Moment” is.  Or we should be given the disaster of the Great Recession.  Whilst it’s true that economics has bumbled along pretty much unaltered since this dark years of just over a decade ago, and, yes, I am aware of the rumblings around the discipline’s edges, others have taken a bash at looking at facts.

One of those people is Walter Scheidel who has given us a much needed historical context for our discussion about inequality.  In a nutshell his extensive study of the history of inequality suggests that elites will always, and everywhere, succeed in rigging society for their own gain.  Whether they bother to hide their efforts behind socially acceptable or ideologically logical drapes is of no consequence: elites will find a way to enrich themselves at the expense of everyone else.

The forces that counter the elites are not, generally, benign democratic pressures.  They are basic things like plagues, wars, and other devastations that upend the carefully constructed “norms” that form the basis of elite suppression of the masses.  Such events sweep away the existing elite and create a space for a new struggle for power.  During that struggle, whilst there is no elite to create new punitive rents or to exploit the broader population, brief bursts of relative equality break out.

Perhaps the most obvious example would be the shift that followed the Black Death in Europe in the 1300s.  The scarcity of labor, especially skilled labor, after the plague had abated led to a remarkable period of relative wage equality in those nations that suffered through it.

Another good example would be the first half of the twentieth century during which the cataclysm of the world wars destroyed so much capital that elites needed a great deal of time to re-establish their hold over society and thus get back to their rent seeking ways. It wasn’t until the neoliberal ascendancy after the Reagan/Thatcher led installation of anti-social policy that our contemporary elites could exploit society in the manner of elites of old.

Which brings us to our Scheidel Moment.

Does the current global crisis caused by the novel virus spreading rapidly amongst us constitute a potent enough challenge to elite power and entrenched ideology that it opens a space for re-balancing societies away from the egregious inequality produced by neoliberalism?

It’s too early to tell.

But there are rumblings and murmurs enough to suggest that, at the very least, a conversation might be beginning.  Here’s a quote from the New York Times this morning.  The writer is Michelle Goldberg, a reliably socially oriented thinker …

“Since the election of Ronald Reagan, America has tended to value individual market choice over collective welfare. Even Democratic administrations have had to operate within what’s often called the neoliberal consensus. That consensus was crumbling before coronavirus, but the pandemic should annihilate it for good. This calamity has revealed that the fundamental insecurity of American life is a threat to us all.

“There’s no such thing as society,” Margaret Thatcher famously said. “There are individual men and women and there are families.” Tell that to the families effectively under house arrest until society gets this right.”

Naturally America is replete with suitable right-wing counterpoints.  There are states whose governors still haven’t seen fit to react powerfully to the spread of the virus.

Yet the debate over what form an economic support plan should take, and the quite clear difference in impact the crisis will have on various income levels throughout the country, suggest a significant amount of unrest is building.  And, perhaps, more importantly in terms of getting action, even the elite is realizing that its heady wealth and income are insufficient to insulate it from the shoddiness of the healthcare system they refuse to innovate or invest in.  After all if a plutocrat cannot simply buy their own respirator because there aren’t any to be had, and if they suddenly have to make do like the rest of us, what’s being a plutocrat worth?

So, is this a Scheidel Moment?

Who knows.  But it might be if we shout loud enough.

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Off Topic: Gun Hypocrisy

Just a quick note to record my reaction to the announcement by the National Rifle Association that no one will be able to carry a gun into the auditorium when Vice President Mike Pence is giving his address to this year’s convention.

This is from the same group that advocates the possession of guns as the only true answer to violence. According to the NRA the presence of guns radically reduces, if not eliminates, the threat of mayhem. They, for instance, argue that arming teachers is the best way to prevent more school shootings of the kind we recently witnessed in Parkland Florida.

So it comes as something of a shock to hear that this prescription does not apply to the Vice President.

Why not?

Do we not want him to be safe?

Do we want to expose him to greater risks than those we feel appropriate for school children?

Surely, by extension of NRA logic, we ought to arm everyone in the audience, perhaps doubly so, in order to protect such a high ranking official.

Surely, if we are told that arming teachers to the teeth is the way to cure ourselves of the school shooting epidemic, and if the only way to stop “a bad guy with a gun” is a “good guy with a gun” as the NRA repeatedly tells us, then not making this incredible service available to Mike Pence is a gross dereliction of duty.

So what’s going on?

Is it that the NRA is spewing rank hypocrisy?

Surely not!

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